by James Grant
Before first light, the three brokers left their train on the Jersey side of the Hudson. They boarded a ferry for Manhattan and made their way on foot to the financial district. Across the river, in Brooklyn, Fourth of July fireworks began to pop. Before dawn the temperature was 80 degrees.
At the locked Housman door, the men stopped short. Suddenly Baruch remembered the key and somebody noticed the transom. Sailing, the lightest, hopped on his brother’s shoulders, climbed through, dropped to the floor, and opened the door from the inside. Baruch got busy on the cable to London with orders to buy. Presently, Housman himself arrived and began to rouse his sleeping customers on the telephone, which he cranked. Baruch overheard him in top bull-market form: “Great American victory. . . . New markets. . . . Empire rivaling England’s. . . . Biggest stock boom in years. . . .” Orders poured in.
In New York next day, stocks opened higher but faded before lunchtime. In Europe, Spanish bonds advanced on the theory that peace would benefit the vanquished too. A. A. Housman & Company took its profits Tuesday morning. Although it was far from alone in buying in London on Monday, it revealed itself as a resourceful and wide-awake firm.[8]
When he first got to Wall Street, Baruch believed that $6,000 a year was all that he needed because that would be all that he could reasonably spend. As the 1890s wore on and as his vistas widened, $1 million seemed a reasonable sum to possess. On the available evidence, his fortune rose from next to nothing to $1 million in about three years, from 1897 to 1900. As striking as the speed with which he made it is the variety of means employed. Nowadays on Wall Street nearly everybody is a specialist: broker or venture capitalist; floor trader or investment banker. Baruch was all those things at once.
One particularly eclectic episode of moneymaking involved the acquisition of the Liggett & Myers Tobacco Company in 1898 and 1899. It began with a visit to the Housman offices of an Annapolis man named Hazeltine. Hazeltine had resigned his Navy commission before the Spanish war to enter business but had returned to the colors that spring. In the fall, he was again demobilized and, back in business, he had come to see Housman with some information. He said that it was his understanding that the Union Tobacco Company wanted to buy Liggett & Myers, of St. Louis. He happened to know the Liggett people intimately and could help bring them and Union’s management together.
The reason for Union’s interest was that Liggett & Myers was one of a few large tobacco companies outside the realm of the American Tobacco Company. American was king of the trade, commanding most of the cigarette market and much of the larger chewing-tobacco, or “plug,” business. This was the heyday of trusts, and James B. Duke, president of American, had it in mind to monopolize. Union, behind which stood some prominent moneyed men and a top American defector named William Butler, was formed to stand in Duke’s way. Both Union and American sought Liggett & Myers.
What American had in market share, it lacked in public relations. It was hated and feared by growers and rival manufacturers. It was hated, but also tolerated, by many of its customers, for in seeking to absorb the competition, it first cut prices. At great cost to Duke, it pitted Battle Axe, its fighting plug brand, against Liggett & Myers’ Scalping Knife. (In the stock market, American also had its enemies. “The stock,” The Wall Street Journal commented, “has been more or less boycotted in Wall Street, because of its manipulation by one of the officers of the company, and probably no dividend payer on the list has been more persistently ignored by commission houses and other interests in Wall Street which believe in open and above-board methods in the management of a company, and its stock interests.”) By late 1898, it might have seemed to American that the plug war was well on its way to being won. Just then appeared Union.
In short order in the fall of 1898, Union bought two of the three major independents, National Cigarette & Tobacco Company and Durham Tobacco Company. Liggett & Myers, the third and greatest prize, remained. It was agreed by Housman, Baruch, and Hazeltine that they would pool their resources in order to bring about a merger.
Baruch, for his part, labored under the drawbacks of relative youth, of knowing none of the principals and of having no experience to speak of in corporate finance. Furthermore, chewing tobacco, of which Liggett & Myers was the leading manufacturer, made him sick. On the asset side, there was his considerable personal equipment as well as the fact that he knew whatever Hazeltine knew. His first step was to meet and sound out Thomas Fortune Ryan, a chief stockholder of Union, and George Butler, a brother of William Butler, Union’s president. This was duly arranged: “Their conversation was guarded at first,” Baruch wrote, “but I gathered that Hazeltine was correct about their wanting to purchase Liggett & Myers. Moreover, with the information Hazeltine had given me, I was able to convince these gentlemen that I might be useful to them in the matter.” Before long, Baruch and a lawyer named William H. Page had been retained by Ryan to proceed to St. Louis and help negotiate an option for Union to buy Liggett & Myers. Baruch kissed Annie goodbye and boarded a train west.
In St. Louis the lie of the land appeared to favor Union. One substantial minority stockholder was believed to be ready to sell to Duke at the drop of a hat. But Colonel Moses Wetmore, the Liggett & Myers president, disliked the trust, had vowed never to sell out to it and, together with a united band of heirs and corporate officers, evidently controlled the majority of stock. Talks on the Union side were conducted mainly by George Butler, who happened to be an old friend of Wetmore’s. (Just what Hazeltine knew that Butler didn’t know, or couldn’t have found out from Wetmore, is something of a mystery.) Baruch and Hazeltine were relegated to the ancillary duty of ingratiating themselves with the heirs. After weeks of amiability and low-key southern salesmanship, Baruch was recalled by Ryan on special assignment.
The job that Ryan had for Baruch was to harass the American forces in the stock market by a campaign of short selling. The obvious target was American Tobacco itself, but every short seller must sooner or later buy, and there were relatively few American shares in the market. Ryan thus chose Continental Tobacco Company, an American subsidiary, which traded actively outdoors on the Curb Exchange. Baruch’s instructions were to drive down the price of the stock and generally to “hang on the flank” of the company and its management. Ryan turned over $200,000 as market ammunition.
Baruch began his operations in the iron cold of January 1899 with the assistance of two floor (literally street) traders, men named Lavino and Tobey. His tactics were to sell Continental when it was strong and to buy it when it was weak; to sell short when the stock was rising and to “cover” his shorts, or purchase the stock he needed to deliver, when the price was falling. Each morning he left Annie, now pregnant with their first child, and dropped in on Ryan at his house on West 72nd Street, which teemed with little boys. Ryan received Baruch in his bedroom and listened to his reports while he shaved. In January the damage to Continental amounted to a fall from 43 to 37. On February 18, the price hit 30½. Although the weakness in Continental was ascribed publicly to the tobacco wars, it bears mention that the drop in that stock was far more severe than the drop in American. One day when Continental was especially hard hit, Ryan demanded to know how much Baruch was costing him. As a matter of fact, Baruch said, he was making his $200,000 grow. “I want you to annoy them,” said Ryan, with mock severity, “but I don’t want you to ruin them.”
Meanwhile, newspapers in New York and St. Louis were quoting anonymous sources to the effect that the great Union-American Tobacco war was a hoax. It was argued that although Wetmore would refuse to sell to American, he would nonetheless sell to another company if he could be duped into believing that it opposed the trust. Thus Union was formed, in league with Duke, to furnish the pretense of rivalry. It would buy Liggett & Myers, and American and Union would come to terms. And so it proved that February (although Baruch, for one, and Duke’s biographer, for another, doubted the existence of conspiracy). With the plug war settled at last, by whatever means, shares i
n American and Continental climbed.
When it came time to negotiate a fee with Ryan for the services of A. A. Housman & Company, Baruch tried to enlist the sympathies of Ryan’s lawyer. He offered William Page $10,000 if he could help him get more money from Ryan. Properly taken aback, Page replied that he would do what he could but, as he was Ryan’s lawyer, he could hardly accept money for working against his client’s interest. The fee turned out to be $150,000, “ridiculously small” in the light of the deal, Baruch reflected later on, but Housman hadn’t conceived the business and it was a choice between that or nothing. The fee brought Housman’s earnings in 1899 to $501,000. Baruch’s share of the profits, which Arthur Housman by that time had raised to one-third, amounted to $167,000. This was exactly $161,000 more than the $6,000 that Baruch once thought was big money.
In keeping with the Wall Street maxim that money is more easily got than kept, Baruch next managed to lose most of what he had gained. The vehicle of his losses was the American Spirits Manufacturing Company, the nation’s largest distiller of whiskey. Common shares of the company changed hands inactively on the New York Stock Exchange. In 1898, they had been as high as 15⅜ and as low as 6½. In the spring of 1899, when Baruch sank most of his spare money into the stock, the price was about 10.
Tips to buy had been noised around and had surfaced in the press early in June. The story was simply that insiders thought well of whiskey stocks. It developed that the reason for the optimistic talk was a planned merger of four major distilleries, including American, into a trust. The consolidation was disclosed late that month.
At the turn of the century, “trust” appealed to the imaginations of investors as “growth” or “Internet” were to do some ninety-odd years later. The Street’s thinking was that the whiskey merger would benefit all parties, particularly investors in American Spirits. (Later came reservations about the quality of financial information that the promoters provided.) Baruch bought for that reason and for one other, namely, that Ryan had bought. Or so he was told by a man who presumably knew. It was a plausible notion, because it had been reported that the “Whitney syndicate” was involved in the deal. William C. Whitney, whose Fifth Avenue mansion had once inspired Mrs. Baruch to tell her son, “You will be living there some day,” had been in on the Union Tobacco venture so happily ended. Thus, Baruch loaded up with American Spirits.
The result is told by two quotations. On June 13, the price of the stock was 10¼. On June 29, it was 6¼. Baruch called the loss the quickest and proportionately the greatest of his career. When he explained the details to Annie, he added that, as an economy measure, she would have to give up the black cabriolet, complete with plate-glass lamps and liveried footmen, that he had bought her. At the time she was seven months pregnant.
Rather sheepishly [Baruch related] I admitted to Mr. Ryan the cause of my comedown in the world.
“Did I tell you to buy that whiskey stock?” he asked.
“No,” I said, “I had never asked him about it, but I had heard a man close to him who liked me say that Ryan thought well of it.” [Someone, said Baruch, whom he had met through Ryan in the tobacco operation.]
“Never pay any attention to what I am reported to have said to anybody else,” Ryan replied in his quiet voice. “A lot of people who ask me questions have no right to answers. But you have the right.”
Among the facts not uncovered by Baruch about American Spirits before he invested was that some of the officers were so crooked that, in Keene’s words, “they could meet themselves coming around a corner.”
To lose money in a bear market is regrettable. The sinking of American Spirits was intolerable because the broad market was rising and most of Baruch’s friends were probably getting richer. (Arthur Housman had just returned from a ten-thousand-mile observation-car tour of the American West with the report that silos were full, railroads prosperous, money plentiful, and politics tranquil. “I have come back a greater bull on railroad and industrial securities than ever before in my life . . . ,” he declared.) Unwilling to take a loss, Baruch sold his good stocks to shore up his stake in whiskey. His loss deepened. By the time he extricated himself, he had upset Annie and jarred his own self-confidence. All this within weeks of the tobacco coup.
Fortunately his misery was short-lived. In May, as he was blundering into whiskey, a powerful Wall Street figure, former New York governor Roswell Pettibone Flower, unexpectedly died. Flower was the bull market incarnate. In early 1898, when the bears, or “croakers,” as Housman contemptuously called them, were sitting in the driver’s seat, Flower announced that he was a bull. “I am a believer in American stocks and a buyer of American stocks because I am a believer in our country,” he said a year later. For a time he was opposed in the market by Russell Sage, among other rich bears, but optimism carried the day. So great did Flower’s influence become that, at the top of his form, he could put up a stock market merely by saying that it was due for a rise. One of his favorite issues was Brooklyn Rapid Transit Company, the country’s largest trolley line at a time when Brooklyn was a kind of national Sunbelt. In 1897, when the stock was at 20, Flower invited the city’s workingmen to invest their savings for a rise to 75. When the price reached 50, he forecast a move to 125. Thanks to management that he personally helped to invigorate and to the growth of traffic to Manhattan and Coney Island, the stock that spring touched 135.
Flower was born on a farm in upstate New York, taught school in the country, and remained countryman enough so that, in his term as governor of New York, he could deliver convincing talks to rural audiences on “Hop Culture” and “Insect Pests.” Flower & Company was a leading Wall Street firm, but Flower himself presented an unbankerly appearance, shaving irregularly, filling his left cheek with plug tobacco, and generally dressing down, all the while exuding optimism. “The ex-governor preached Americanism and confidence,” wrote Henry Clews, “until everybody believed that if a stock was only grounded, and the property located in America, you could buy it at any price and still be on the safe side.”
On Thursday evening, May 11, 1899, Flower repaired to a country club in Eastport, Long Island, for a long weekend’s fishing. On Friday morning, he complained of indigestion; that evening he was stricken by a heart attack. His death orphaned a half-dozen “Flower stocks,” so named for the governor’s attention and sponsorship, including BRT, People’s Gas, Federal Steel, Rock Island Railroad, and New York Air Brake. On Saturday the market broke badly. Only the action of a pool comprising Morgan, Keene, Darius Mills, and the Rockefeller interest, among others, averted a full-blown panic on Monday. BRT, which had slipped to 100, rebounded to 115.
In a feeble way stocks rallied that summer, but something was wrong with BRT. In Albany there was talk of a new streetcar franchise tax, and in New York City of a law to require that the line’s aboveground wires be buried. The company’s annual report, which was published late in August, showed lower profits and strangely disclosed no balance sheet. Again the stock worked lower. Baruch had profited by the rise in BRT. Now he decided to share in the fruits of the fall. Early in September, the price struck 100, a point deemed to be a key line of support. “To hold the price there,” wrote Baruch, “Allie Wormser, the sportsman son of one of the partners of I. & S. Wormser, bid par [i.e., 100] for two or three thousand shares. In a flash, I sold them to him.” Baruch sold short, that is, without actually owning the shares he was bound to deliver to Wormser. Those he would borrow. He planned to return the borrowed stock with shares that he would buy at a profitably lower price.
His timing was flawless. On September 5, which was just about the time he sold, the rail and industrial averages began a short, sharp break. Moreover, a well-financed bear pool, including Keene and the brokers Harry Content and Jules S. Bache, had begun to sell BRT. They did so in the face of predictions of a “squeeze” of the shorts, meaning a campaign to ruin them. Baruch, who only three months before had been skinned in the market, sold too. His profits totaled $60,000 a
nd his self-confidence was restored.[9]
In his seventies Baruch sat for a portrait by Yousuf Karsh, the eminent Canadian photographer who had recently snapped the then Princess Elizabeth of England. In the sitting Karsh happened to remark on Elizabeth’s charm, to which Baruch replied with a smile, “As you get older you will realize that every Princess and every wealthy man is charming. I am so much more charming than when I was a mere twenty.” He had, indeed, by that rule, made enormous strides in personality even between the ages of twenty-eight and thirty. “Wealth commenced to pour in on me,” he said of the turn of the century, and he shared that swift untaxed stream with his father, just as he had shared an earlier windfall with Harty. They were an extraordinarily close-knit family. It was no accident, for instance, that his and Annie’s first child, Belle, was named for his mother and delivered by his father at his father’s summer cottage. (Not until he was twenty-eight or twenty-nine and an expectant or actual father did he leave his father’s home on West 70th Street, and his three brothers were still there when he moved.) For years Dr. Baruch had worried about losing his livelihood to younger and better-trained men when he was no longer able to climb his patients’ stairs. On his father’s sixtieth birthday, in July 1900, Baruch was able to present him with a $75,000 retirement trust fund and thereby erase his financial worries. According to Baruch this was the first time that his money had ever engaged the doctor’s interest.
Such was Baruch’s reputation, or charm, that investment proposals were increasingly coming to him. Late in April 1901 a stockbroker named Harry Weil paid a call to court his interest in a new, and as yet unincorporated, retail chain called United Cigar Stores. After Weil laid out the possibilities of sensible pricing and economies of scale, Baruch called Ryan to run the idea past him. Ryan said that he couldn’t see the money in it. Deferring to Ryan, his mentor, Baruch declined to invest. (An ironic miscalculation, as it turned out. Before the end of the year, American Tobacco, of which Ryan was now a director, bought a majority interest in United; within five years the chain had accumulated 150 stores.)